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SEC vs. Ripple: Weekend Brief

SEC vs. Ripple: The Good, The Bad and The Ugly
August 19, 2021
SEC vs. Ripple: August 31st Hearing – The Deliberative Process Privilege
August 31, 2021
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TRANSCRIPT OF VIDEO:

Hello everyone and welcome to Legal Briefs – I am attorney Jeremy Hogan and this is The Weekend version of Legal Briefs.

Not THAT  Weekend but the Saturday/Sunday type and today I’m talking about the SEC lawsuit against the crypto industry because, honestly, I don’t have the energy to talk about other things right now.

And there’s a lot to talk about in the SEC v. Ripple case because there’s a hearing coming up on Tuesday the 31st and it’s more important than I think most people realize because it’s central to a big gamble that the SEC took a couple months ago in the litigation – and I want to tell you about that gambit and how it has and will effect everything that happens in the case.  . And then at the end I want to address Youtuber Bit Boy’s prediction of settlement in September and give new timelines for the case.

But first and most exciting for me as you may know, the Digital Asset Investor and some other members of the XRP crowd have been doing overtime on the research about the SEC and whether it ever made a determination as to whether the Ether token is a security and I did my own research and, this is AMAZING,  I have found a video which actually shows the meeting between the Ethereum Foundation and the SEC which took place at the Foundation headquarters and PROVES that the SEC told Ethereum that the Ether token is NOT a security and how it arrived at that determination.  Roll it.

And that my friends  is how the SEC determined that the Ether coin is not a security – but just a coin.

Welcome back and my Lord was Javier Bardem amazing in that movie. Amazingly creepy that is.

In any case, we have a lot to touch on to get you up to speed so let’s get to it and start with the motion that is coming up for hearing on this Tuesday, August 31 which is Ripple’s motion to compel production of internal SEC documents which show the SEC’s views on whether  Ether is a security.

Now  Remember there are 2 main issues in this case : 1. Whether XRP is a security and,2.  if it was, whether Ripple had Fair Notice it was selling an unregistered security.

 At the initial hearing on this issue, the Judge seemed VERY interested in Mr. Hinman’s 2018 speech stating that Ether was not a security.  And there’s only one reason she’d be interested in Ether – and that is because the court is willing to compare XRP to Ether as far as whether it’s a security or not.  Otherwise, Ether’s security status is completely irrelevant in this lawsuit.  Ripple’s lawyers knew the Court would find this important and so did I when I first read about it back in January this year.  Here is what I said when first noticing the defense taking shape.

I love self-referral to myself as an authority – makes it so easy. I wish I could do that in Court.

And I was correct because we’ve seen the judge during the very first hearing in the case and in the April 6 hearing show a lot of interest in what Mr. Hinman said about ether and I would argue that the SEC’s position on ether is not only important to the Fair Notice Defense but also to the underlying “is XRP a security” issue because the court seems open to comparing the two tokens and basing part of its decision on that comparison. 

Which I think the SEC has caught on to and that is why it backtracked and said that Hinman’s speech was only his personal opinion, and not an official position that Ether is not a security.

So, the discovery is relevant not ONLY to the Fair Notice defense but ALSO to whether XRP is a security. I think everyone understands how the SEC’s thoughts on Ether are relevant to the Fair Notice Defense but the thing I’d like you to understand going forward is that it’s also going to be relevant to the underlying issue as to whether  XRP is a security.

Here’s what the Judge said back on April 6:

This is on page 9 of the transcript.

Judge Netburn: “…Because as I understand it the defendants are saying, well, actually, there are many ways in which they are similar (she’s talking about XRP and ether) and we are at discovery and we are entitled to pursue our own defenses and one of the defenses that we are going to make — maybe we will be successful and maybe we won’t — but one of the defenses is, hey, we are just like those guys and so we want to build-up that defense.”

And as we now know, she DID allow the discovery regarding the SEC’s thoughts on Ether and if she really thought it wasn’t relevant, she wouldn’t have allowed discovery of it.

SO, that’s why the hearing on Tuesday is very important – these documents potentially go to BOTH of the major issues in the case. But don’t take my word for it, it’s also pointed out by the one and only Attorney Matt Solomon in his reply brief in which  he reminds the Judge that SHE said it and here that is in his motion:

“But the  Court already found this discovery “is relevant… to the Court’s eventual analysis with respect to the Howey factors.” Apr. 6 Hr’g Tr. at 51:11-17.  If you’re interested, those numbers at the end tell us what page and lines to look at on the hearing transcript.  That’s page 51, lines 11 thru 17. 

In other words this upcoming hearing is very important because Ripple could potentially get some documents that could really help it advance its position that “XRP is like Ether and in 2018 the SEC said Ether is not a security and therefore XRP is not a security.”

This will be the focus of the next 2 months of discovery – expert discovery – where smart people will talk about decentralization and nodes and ICOs and block mining.

And here where I love practicing law because it really is a chess match.

Great acting in that show by Anya Taylor-Joy. And in a very real sense the SEC has deployed a Queen’s Gambit in this litigation – sacrificing its position on the Fair Notice Defense in order to solidify its central position that XRP was sold as a security.  Allow me to explain.

The first move here was played back in January with Ripple’s focus on Ether and documents about how the SEC analyzed Ether and the focus on Mr. Hinman’s speech.  The SEC was hoping that going into the April 6 hearing that the Judge was not going to bite on the relevance of Ether’s status.  Those hopes were quickly dashed by the Judge as we just saw.  So, the SEC played its gambit which was this in Mr. Hinman’s affidavit filed to try and protect him from being deposed:

Looking at #13 in his affidavit.

“The Speech was intended to express my own personal views. …To the best of my knowledge, the Commission had not taken at that time, and still has not taken, any position or expressed a view as to whether offers and sales of Ether constituted offers and sales of securities”

And thus the gambit was set in motion and this was it: The SEC was going to in a sense admit to some extent that there was confusion in the marketplace about digital securities in exchange for strengthening its position that XRP was a security. Because If Hinman and the SEC HAD taken an official position there would be more certainty for other crypto coins but in turn that would allow Ripple to argue XRP was just like Ether.

So the SEC went down the road less travelled and that has made all the difference – as Frost says. That one decision has colored everything that has happened since and is the main reason Ripple is going to be able to SLAM this Fair Notice argument – look at all wonderous joy this move makes possible.

And before pointing these things out let me give a shout-out to the Digital Asset Investor here on Youtube – I don’t know how he does it but he finds the most amazing things online. So, keep in mind that the SEC is saying “we never had a position on whether ether is a security: and here we have this from the DAY AFTER Hinman’s speech from Commissioner Peirce:

She calls the speech “…a positive step in the SEC’s relationship with innovation.”

Obviously she didn’t get the Memo that this was just Mr. Hinman’s very personal thoughts and feelings. And another SEC Commissioner apparently never got that memo:

And apparently Even Mr. Hinman didn’t get his own Memo because there’s No “I’s” in his “We’s:

Or maybe Hinman just wants people to refer to him with the pronoun “We?”  Just saying.

But the point being that these videos and clips – you could go on and on with them, and at some point Ripple is just going to have to make a top-five list and go with it to demonstrate to the Court the confusion that was and is still in the marketplace for its Fair Notice Defense.

And of course I wouldn’t want to leave out what to me is perhaps the ultimate piece of evidence of market confusion which is this email from the SEC to an individual who asked the SEC whether XRP was a security, or not, and this was the response:

“Please be advised the SEC has not issued a determination on whether the cryptocurrency XRP is a security.”

And that was dated October 14, 2020 – 2 months before the lawsuit was filed!  I guess the SEC staff who wrote that email didn’t get the memo that Ripple was about to be sued.  Woops.

But these things were part of the gambit that the SEC took here and it’s not an illogical position.  First, recall that the SEC moved to strike Ripple’s Fair Notice defense and I’ve already said that I don’t think the defense will be stricken but the SEC has a lot riding on that motion and it plays into our timeline which I will explain in a second. BUT there’s at least a possibility that the SEC wins that motion and a lot of this stuff would then become…irrelevant.

And by arguing that the SEC took no position on whether ether is a security or not, it can argue that any comparison between the two is irrelevant.  Now whether that argument works is complicated but the gambit at least allows them to make the argument.  So, keep that in mind as we see the next couple weeks unfold.

But just understand that the SEC is playing a dangerous gambit which gives a lot of ground on the Fair Notice defense while trying to strengthen its argument that XRP is and was a security.

And FINALLY, to briefly talk about timelines for everything, and here’s where I speculate and everyone hopes I fall flat on my face for your viewing pleasure. 

We recently had a Joint motion to extend discovery – meaning both parties were agreeing to it. Apparently a lawyer got sick and so the Brad Garlinghouse and Chris Larsen depositions could not go forward so they are being pushed to September 14 and 20.

 Lawyers are human and get sick and take vacations – we are not all blood sucking robots.

This does do a couple things, and here it is in the joint motion, which was granted:

Looking at page 2, 2nd paragraph:

“Accordingly, the parties respectfully request that the Court correspondingly  extend expert discovery until November 12, 2021, with opening expert reports due on October 4,to allow for the same amount of time between completion of those depositions  and expert reports as under the prior schedule”

Basically the entire schedule I being pushed back 3 weeks with discovery not concluding until November 12.

Now, I recently started watching Bitboy Crypto on Youtube – he has a really cool channel and he is so good at talking off the cuff – he even talks about XRP while driving to church – allelujah.  But according to him the Ripple case is being settled in mid-September and here he is:

Bitboy – do you play any instruments?  Drums maybe? Let’s do this thing.

But props to him for throwing a prediction out there.  My prior thoughts on settlement were predicated on an unprecedented  lull in the litigation right when things should have been picking up, and of course three days later the litigation picked up again and I had to backtrack.  But what BitBoy is saying is not impossible – settlements can happen anytime. 

I literally settled a case in the bathroom of the courthouse during a bathroom break DURING the  trial of the case.  It’s a long story.

The problem with a settlement between now and November 12 is that the parties won’t know how strong each side’s position is until after discovery closes. SO even if we are looking at a “slap on the wrist” settlement of millions of dollars – how many millions? 10, 20, 200? You think that Ripple isn’t going to care about the difference between paying 20 million dollars versus $200 million?  I think any business cares about that and is willing to wait an extra couple months in order to potentially save millions of dollars.

And from the SEC side, how can it settle without knowing the fate of its motion to strike Ripple’s Fair Notice defense? The SEC’s Queen’s Gambit has put a LOT of weight on that motion and it’s STILL not resolved and the Judge has not told us when she is going to make a decision on it.

I want to admit something to you that…I don’t tell many people and is a source of some shame for me.  When I was younger, just out of law school ,…. Uhhmmm… I worked for insurance companies for a couple years.  Yes, I worked for State Farm, Progressive, all of them.  It’s not a period of my life that I’m proud of.  (Music?)

In any case, when we had a bad factual case – a case we were likely to lose, we’d move for summary judgment on the problem issue to try and keep it away from a jury.  And literally the conversation between myself and the litigation adjuster went like this:  I’d say “let’s get our motion for summary judgment heard and if I can’t get the judge to bite on it and get that issue thrown out by the Judge, I’ll approach the other side and we’ll get the case settled.”  In other words, we’d either bury the problem or pay it away.  I called it a bury or pay case.

And I see a similar hallmark in Mt to Strike the Fair notice defense.  The SEC has so much riding on it, I don’t seem much impetus for them to settle until that hearing is heard.  In other words, if they can’t bury the defense, they might just turn around and pay – which in our case means get the case settled.

Because what I know for a fact is that Ripple wants this case over with the caveat that the markets have to feel comfortable with any settlement.  Which means that the “problem child” here is the SEC and if the SEC’s gambit fails, that’s when the litigation has the best chance at resolving.

Otherwise, we are still looking at the Ripple case reaching the Judge on Summary Judgment in early 2022. But for the time being, here is where things stand – Black’s move.

Thanks for watching and I was just thinking that  life is kind of like one big gambit, sacrificing small things in order to gain the big things in life.  Enjoy the game my friends.

Jeremy Hogan
Jeremy Hogan
Attorney Jeremy Hogan is a partner at Hogan & Hogan.